By far the major component of the group of fees you’ll pay in exchange for accepting payment by credit card is the fee that you pay on a per transaction basis, usually a percentage of the transaction amount. This percentage is called the discount rate and is automatically subtracted from the transaction amount; the remainder is deposited into your merchant account. Discount rates can be calculated in various ways one of which is Bill Backs.
Bill Backs is a fairly new model for pricing credit card transaction fees or discount fees. It is a variation on a model called interchange plus pricing. Interchange plus pricing is where a bank charges you their inter-banking transaction fees (a percentage of the transaction amount) plus a mark-up and other fees and costs. Every transaction that your merchant bank requests from the cardholder’s bank carries a fee which the merchant bank pays to your cardholder’s bank. This fee is called the interchange fee.
The difference between Bill Backs and interchange plus is that the bank where you hold your merchant account, charges you their interchange fee when you make the transaction. So you receive the amount charged less the bank’s interchange fee into your merchant account. All other fees and costs for every transaction are added up at the end of the month and billed in one sum on your next month’s statement.
There are three main problems with Bill Backs as a pricing system and it is not the optimal system for retailers. For one, it is extremely difficult to match the actual cost of a transaction: you’ll see the interchange fee billed alongside the transaction but you will need to try and audit your fees statement to find out how much you actually paid in fees for a particular transaction.
Secondly, it is hard to make financial forecasts and to put together financial statements, if you don’t know straight away how much a transaction will cost you. Finally, there is a lack of transparency: again, because you don’t see all the costs of a transaction straight away, banks who offer merchant accounts based on Bill Back pricing can sometimes sneak one past you, by making it appear cheaper to transact with them than it really is.
The good news is that Bill Backs is only one of many pricing models and it is definitely not the industry mainstay, so you can probably avoid this pricing model if you shop around. The most popular pricing model is called Three Tier pricing in which you pay a once-off percentage fee associated with every transaction: the fee you pay is subtracted from the transaction amount and you receive the remained, say 97.5% of the amount for a 2.5% fee. The only costs and charges you would pay in addition to that would be fees such as a monthly maintenance fee and so forth.
Compared to 3 Tier pricing, Bill Backs could, on face value, appear cheaper as the per transaction percentage charge is less. In all likelihood though you will end up paying more, or worse, not realize you are paying more, so shop around.